In the markets: What to watch this week

As the battle rages…

The political tensions surrounding the Treasury will be highlighted this week as Pravin Gordhan delivers his medium-term budget statement.

Any actions taken by the Hawks against Gordhan prior to the statement will be viewed as a tactic designed to interfere with the finance minister ahead of yet another important event, at a very important time for South Africa.

SA is in a difficult situation: 0.6% GDP growth; a budget deficit of 4.2%; government debt of 50.1% and steadily increasing; and current account to GDP deficit of 4.4%.

Pravin walks the tightrope in Parliament on Wednesday.

Also due later in the week are producer price index (PPI) figures, which might show a decrease on the back of lower import costs due to the strengthening rand.

With central banks introducing quantitative easing programmes, and deliberately keeping rates low, bond owners have effectively been left with two choices: If they want the return they have become accustomed to, they need to move further down the risk curve and invest in riskier bonds.

In the past, investors could have invested in global government bonds and, although returns weren’t particularly attractive, they would have received a real return without taking on risk.

The flows to higher yielding bonds have strengthened the rand significantly since January.

…things could get tighter

On Friday, private sector credit data will show what effect the relatively high interest rates have had on the economy.

Last week Thursday, Reserve Bank governor, Lesetja Kganyago, said that rate cuts are not imminent as consumer inflation boiled over the target band of 3% to 6%, reaching 6.1%.

“Should the forecast materialise‚ the hiking cycle may be nearing its end. However‚ this does not mean interest rate reductions are imminent as we would like to see inflation more firmly within the target range on a sustainable basis over the forecast horizon‚” Kganyago said at a South African Chamber of Commerce and Industry annual convention.

Other important economic announcements this week:

Monday

• Japan Balance of Trade
• German, Euro Area & US Markit Manufacturing PMI

Tuesday

• South Korea GDP
• German Ifo Business Climate
• US Richmond Fed Manufacturing Index

Wednesday

• German GfK Consumer Confidence
• US New Home Sales
• Thursday
• Great Britain GDP
• US Durable Goods Orders, Pending Home Sales, Kansas Fed Manufacturing

Friday

• SA M3 Money Supply
• Great Britain GfK Consumer Confidence
• France & Spain GDP
• Japan Inflation and Unemployment
• Euro Area Business Confidence
• US GDP Growth Rate and Employment Cost Index
• German Inflation

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.